Black Book explained how its depreciation forecast of 13.5 percent for 2014 is still on track, even though the market produced a pace much slower than that expectation during the first six months of the year.

Senior vice president and editorial director Ricky Beggs pegged the depreciation rate of late-model used vehicles during the opening half of 2014 as falling between 3.7 percent and 4 percent, a level even lower than what he called the “unbelievably strong” reading of 7.7 percent that the marketplace experienced in 2011.

During a recent phone conversation with SubPrime Auto Finance News, Beggs acknowledged his dialogue with finance companies after mentioning that depreciation level quickly turns to talks about what’s going to happen during the second half of this year. Beggs emphasizes that the market still is poised to post that predicted depreciation level of 13.5 percent — a reading that would mark an uptick from 12.8 percent registered in 2013.

Beggs explained that the seasonality of the depreciation cycle — stronger readings often seen during February, March, April — behaved differently this year.

“The strength in the seasonality and the positives in the marketplace were a little later happening than normal because of the brutal winter weather. It just kept people out of the marketplace,” Beggs said. “The strength actually stayed there a little longer than what we’d normally expect. Normally, we’d expect that mid-April time period for the market to soften. This really went on through about the middle of May, almost the third week of May before we started to see levels of depreciation changing from that seasonal strength.”

According to Black Book, both new- and used-vehicle markets are seeing positive growth after hitting a low of 10.3 million new-vehicle sales in 2009. As a result, depreciation has increased every year since 2011. Black Book projects new-vehicles sales to finish north of 16 million units this year and at least 16.5 million in 2015.

“What to expect going forward is a little more movement in the marketplace during the second half of the year,” Beggs said. “Part of that can be attributed to more supply coming into the marketplace. We’ve got more cars that are coming off lease. We’ve got a great new-car sales level. Remember about 60 percent of those vehicles sold new are going to have a trade-in, so there’s a good supply.

“Ultimately, I do feel like the second half of the year will be more in that 8 to 10 percent level of depreciation level, which put us at that that 13.5 percent level for the year,” he added.

Impact on Auto ABS

According to the latest joint vehicle depreciation report from Black Book and Fitch Ratings, rising depreciation likely will lead to marginally higher losses for U.S. auto ABS,

In the auto lease ABS sector, the firms indicated that rising supply from off-lease volumes this year will contribute to higher depreciation in 2014, and pressure residual value losses.

“This is not expected to pose any material threat to overall asset performance nor outstanding ratings,” Fitch said.

“In the rental car ABS sector, Fitch noted that rental car company fleet depreciation rates will creep up, but stay within the historical range of 1.0 percent to 2.0 percent per month, depending on each rental car company’s fleet mix.  

“Housing and service industries will continue to be a net positive for larger vehicle sales and retention levels, although trucks and later-model vehicles are exhibiting higher-than-normal valuation volatility,” Fitch said.

Fitch reiterated in the report that it expects little impact in 2014 on auto loan ABS if vehicle depreciation rates rise this year. Analysts made that assertion because annualized net losses dropped to 0.24 percent through May of this year, down 9.1 percent compared the same period in 2013.

And subprime loan annualized net losses stood at 3.46 percent through May, 11 percent below 2013 and well below the weak span between 2008 and 2011, according to Fitch.

Incentives and Gas Prices

Beggs cheered the ongoing moves made by automakers. They’re not flooding the market with new models nor are they slapping lots of cash on the hood to turn that new metal. Beggs indicated that most new-car incentives have stayed somewhere between $2,200 and $2,800 for much of the past three years.

“They’re trying to maintain that days’ supply level at reasonable levels. The manufacturers as a whole are much better at that than they have been. That’s positive thing out there that’s making the market a little bit smoother in its reaction,” Beggs said.

“Yes, they still want to sell new cars and they’re going to be aggressive to do that,” he continued. “Things haven’t gotten out of kilter with incentives.

“But where we’re seeing incentives this year has been focused and advertised on leasing payments,” Beggs added. “You’ll see the incentives put into a lease payment. You can hide that incentive a whole lot better, which has less negative effect on the used marketplace.”

Another element not having such a significant effect on depreciation nowadays is the price consumers pay at the pump. Beggs contends that gas prices would have to surpass the record of $4.11 established back in 2009 to create a major impact.

“I think we’re at that level where we do accept it to be where it is,” he said. “To get to an effect where people really start talking about it again, we’d need a new record high for it to get beyond just talk at the water cooler.”

Depreciation Trends Beyond This Year

Looking forward beyond the close of 2014, Black Book expects annual depreciation to approach 16.5 percent next year. It’s a level Jared Kalfus recommends that finance companies not experience flat-footed, especially when other credit market elements come into play.

“It’s a good time to slip that reminder in there that when you look at the recipe for a profitable portfolio strategy, those common core ingredients tend to include historical depreciation, trends in the marketplace and residual forecasts,” said Kalfus, who is vice president of data licensing at Black Book Lender Solutions.

“It’s important to point out that while we do expect interest rates at some point will begin to rise, I don’t think we’ll feel the real brunt of that until we get toward the latter part of 2015,” Kalfus continued. “Where we’ve got to be cautious when that occurs is that those rises in interest rates could lead to a rise and acceleration in depreciation, which could take some of the wind if you will out of the consumers’ sails. They could begin to get nervous with higher interest rates coupled with higher depreciation. That could be a recipe for some challenges going forward.

“Greater and accelerated depreciation means it takes a longer time for a consumer to get into a positive equity position,” he added. “If you consider those two pieces of data, there are definitely things to watch.”